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Ominous Iron Ore Forecast for Australia ETFs

Beset by sliding commodities demand, a falling currency, mediocre economic data and fears of Federal Reserve tapering, the iShares MSCI Australia ETF (EWA) has been a disappointment this year with a loss of nearly 8%.

In fairness to EWA, the fund has perked up in the past month, gaining 4.7% as the weak Aussie has started to show some signs of benefiting Australian stocks. Previously identified beneficiaries of a weak Aussie include Westfield, News Corp, QBE Insurance and Brambles. Of that group, only News Corp. is not a member of EWA’s 70-stock lineup. [Australia ETF Offers Rebound Potential]

While EWA’s performance has recently improved, the ETF and the Australian economy, the world’s 12th-largest, are far from out of the woods. In fact, an ominous forecast on iron prices courtesy of Goldman Sachs could weigh on EWA.

“Spot iron ore prices currently over around $131 a ton, but but Goldman Sachs sees that price falling to $108 per ton next year as seaborne iron ore moves to oversupply. Analysts believe spot iron ore could average USD126 per ton this year, a four-year low,” according to Investing.com.

Goldman said Australian mining giants such as BHP Billiton (BHP) and Rio Tinto (NYSE RIO) could continue mining iron ore profitably even if prices fall, but smaller miners could be crimped by declining margins. Brazil’s Vale (VALE) is the world’s maker of iron ore, a key ingredient in the production of steel.

Australian materials names, over 18% of EWA’s weight, benefited from China’s insatiable demand for iron ore. Iron ore prices surged to a record $200 per ton in 2011 as the Chinese economy surged, helping the Australian economy and dollar soar, too. Over the past four years, EWA is up about 23%. The CurrencyShares Australian Dollar Trust (FXA) is up 10% over the same time.

The Reserve Bank of Australia left interest rates unchanged at a record low of 2.75%. It was widely expected that RBA would do that, but many traders and market observers expect RBA will not leave rates at 2.75% for the rest of this year. However, the weak Aussie could crimp plans for additional rate cuts.

As for declining iron ore demand and prices, that is a potentially negative catalyst that cannot be overlooked with regards to EWA. BHP Billiton, the world’s largest mining company, is the ETF’s second-largest holding with a weight of 10.7%. Rio Tinto is also a top-10 holding in EWA. Making those stocks all the more vulnerable is recent news from both companies of near record levels of iron production, something that does not jibe with the spate of disappointing economic data out of China.

iShares MSCI Australia ETF

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ETF Trends editorial team contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.